Marketing return-on-investment - what is ROI and how is it measured?

By Josh Hall

Marketing activities can make or break a small business. The way in
which you market your firm is key to your success; well thought out,
properly executed campaigns can help to ensure that your venture fulfils
its potential, while poor or non-existent marketing can destroy any
chance of success.

Many (but by no means all) firms understand the importance of marketing.
But a surprisingly low number of small business
efficiently measure the effectiveness and financial return on individual
campaigns. If you are to ensure that your resources are used in the most
efficient way, you must monitor your marketing spend against the success
of each campaign.

What is marketing return-on-investment (ROI)?

First of all, it is important to note that the cost of marketing is not
an expense – it is an investment. This is a vital distinction that is
all too often ignored. Marketing is not an overhead like heating or
stationery. When you spend money on marketing you are doing so in the
hope that it will earn you money in the future.

If you were investing your money in an ISA, you would want to know the
return you would get. Your return on investment (ROI) for marketing
activities can be thought of in similar terms. It is expressed as a
percentage figure, and tells you how much you have gained in profit in
relation to the amount that you first invested.

Looking at your marketing ROI can help you in a number of ways. On the
most fundamental level, it can help you judge the success of your
efforts in comparison with other potential investments. For example, if
your ROI is less than you would get in interest if you put the cash in
the bank, you are doing something wrong. Once you have run a few
campaigns, comparing ROIs can help you to track improvement and
comparing the results of activities will help you identify which
campaigns and tactics are best for your business.

How to work out marketing ROI

A percentage value greater than 0 per cent means that you made a profit
on your investment. But marketing ROI calculations can become very
complex very quickly. For example, you might be running a campaign
across several platforms, aiming to elicit a range of different
responses. These responses might not all be a simple sale. This is where
marketing ROI becomes very difficult to judge.

As a simple metric, marketing ROI comes into its own when you are
running something like a direct mail campaign. Here the expenditure and
the response are easy to quantify; your investment is the cost of the
direct mail, and your yield is the value of each sale that arises from a
response to your campaign. You can then tweak aspects of your campaign,
and judge the impact of these changes by looking at their effect on your
ROI.

What are the other measures of success?

Sometimes, marketing campaigns do not provide a yield that is measurable
in pounds and pence. For example, you might be running a campaign
intended solely to raise awareness of your firm, rather than to directly
generate sales. In these cases a simple ROI calculation is unlikely to
be the best measure of success.

The way in which you measure campaign success will depend on your
desired response. For example, if you are running a pay-per-click
campaign to drive traffic to your website, you would keep track of the
number of clicks generated by your ads. You could then tweak an element
of the campaign and see whether the number of clicks rises or falls.

In some cases it will be virtually impossible to accurately judge the
success of a campaign. For example, if you are handing out product
samples in the street you have no way of telling how many of the
recipients will then go on to make a purchase as a result. You can,
however, look at your general sales trends; if volume or turnover are
dropping or remaining level, your marketing efforts are not working.

The key to marketing success

Careful monitoring is the key to success in marketing. The worst case
scenario is that you do not keep track of any of your marketing metrics.
The natural conclusion of that scenario is that resources are wasted
and, ultimately, marketing budgets are cut as it is deemed to be a lost
cause.

Even if you cannot measure your success down to the last penny, make
sure that you keep as close an eye on your marketing yields as possible.
This will help you to direct your resources more effectively – and to
increase sales as a result.